On April 7, 2010, the U.S. Sentencing Commission voted to amend the federal Sentencing Guidelines in several respects as they relate to corporate compliance and ethics programs. These amendments will take effect on November 1, 2010, unless Congress passes legislation rejecting them (which is extremely unlikely).
Reporting to the Board
The most significant amendment expands the situations in which a company’s “culpability score” (and hence its criminal fine) can be reduced if the company has an effective compliance program. Currently, the Guidelines prohibit this reduction where either (i) the company unreasonably delayed reporting the offense to appropriate government authorities, or (ii) high-level personnel (a director, an executive officer or a person in charge of a major business unit) participated in, condoned or willfully ignored the offense. The amendment removes the second prohibition and permits a reduction even when high-level personnel were involved in an offense, provided that all of the following conditions are met:
- the company’s top compliance personnel have direct reporting authority to the company’s board or audit committee on any matter involving criminal conduct and, at least annually, on the effectiveness of the compliance program
- the compliance program detected the offense before it was discovered by outsiders
- the company promptly reported the violation to the appropriate authorities
- no individual with operational responsibility for the compliance program participated in, condoned or willfully ignored the offense
The Guidelines already encourage reports to the board by compliance personnel, but this change provides a substantial incentive for all companies to adopt a direct-reporting relationship, which should help increase the efficacy of compliance programs. Note that the Guidelines require “express authority” for compliance personnel to communicate personally to the board. Thus, companies adopting this practice should document it.
Responding Appropriately to Criminal Conduct
Second, the corrective steps a company should take if criminal conduct is detected have been elaborated to include the following:
- taking reasonable steps to remedy the harm resulting from the criminal conduct, which may include, where appropriate, providing restitution to identifiable victims, self-reporting or cooperating with the authorities
- preventing further similar criminal conduct by assessing the compliance program and making any necessary program changes, possibly with the help of an outside professional advisor
Although all violations should trigger a program assessment of some kind, not all require the use of an outside professional advisor. Whether an outside advisor is appropriate depends on the seriousness of the offense, the magnitude and complexity of the modifications to the compliance program that may be needed, and the extent to which implementation of modifications seems likely to meet resistance within a company.
No Document Retention Requirement
Finally, the Commission decided not to adopt two provisions it had been considering that would have elevated the significance of document retention and made it a high-risk area. The Commission received numerous comments suggesting that these proposals would skew companies’ compliance efforts in unsound ways.
Although the Sentencing Guidelines focus on compliance programs in the context of criminal sentencing, we expect that these amendments will be incorporated into the “best practices” for compliance and ethics programs generally. For example, the Department of Justice and other federal agencies typically use the Sentencing Guidelines criteria in evaluating companies’ compliance and ethics programs as part of their decision-making in civil False Claims Act investigations and administrative penalty matters. Prudent companies should evaluate their compliance and ethics programs in light of these new amendments and make appropriate modifications if necessary.